Fed hikes interest rates, signals two more increases for 2017

The Federal Reserve’s top policymaking body on Wednesday pulled the trigger on another increase in interest rates, the first since Donald Trump became president, and signaled there will be two more hikes this year.

The Federal Open Market Committee, which sets the key borrowing rate that affects interest payments on everything from mortgages to savings accounts, raised rates one-quarter of a percentage point. Still, the FOMC emphasized that it plans to nudge up interest rates gradually. The key rate now stands at between 3/4 of a percent and 1 percent.

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The central bank's nascent campaign to move toward a more normal interest rate environment could dampen economic growth and the stock market rally, potentially putting the Fed on a collision course with Trump, who hopes to jumpstart the economy through tax cuts and infrastructure spending.

In a statement following two days of meetings this week, the FOMC said inflation has risen, “moving close” to the central bank's target of 2 percent, mainly due to increases in energy and food prices.

“The Committee will carefully monitor actual and expected progress toward its inflation goal,” the FOMC said. Minneapolis Fed President Neel Kashkari was the only FOMC member to vote against the rate increase.

The decision follows a Labor Department report last week that the unemployment rate fell to 4.7 percent in February, down from January’s 4.8 percent, with the addition of 235,000 jobs. Wages were up 2.8 percent over February 2016. The Dow Jones Industrial Average has risen by about 12.5 percent since the presidential election.

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In a press conference following the meeting, Fed Chair Janet Yellen said some FOMC members had "penciled in" fiscal policy decisions that Trump might make, but that wasn't the basis for Wednesday's decision.

The rate hike, though small, will lead to higher borrowing costs for debt without a fixed interest rate, such as credit cards, lines of credit taken out against home equity, adjustable mortgages and variable rate student loan debt, said Greg McBride, chief financial analyst at Bankrate.com.

“Look to refinance into fixed rates, pay down debt aggressively, and take advantage of opportunities like 0 percent balance transfer offers on credit cards,” McBride suggested to consumers.

Meanwhile, fixed mortgage rates tend to climb in anticipation of Fed rate increases, McBride said, pointing to a rise of three-quarters of a percentage point in the last half year.

“Any further sustained increases in mortgage rates would be predicated on faster economic growth, higher inflation, or a Fed that is more active than anticipated,” he said.

Nine Fed officials — more than half the 17-member FOMC — predicted there would be two more rate increases this year, placing the borrowing rate at the end of the year between 1.25 and 1.5 percent, while another four officials expected three more hikes.

Officials maintained their projection that the central bank would hit its target of 2 percent inflation in 2018, though they now estimate core inflation will grow slightly faster in 2017 than they predicted in December.